If you want to cut thousands and thousands of pounds off your mortgage costs, this is the way to do it....
With the UK mortgage market still suffering after the credit crunch, it’s rare to see a glimmer of hope for homeowners.
After a sharp decline in the number of products available, increases in interest rates and soaring up-front fees, many borrowers looked set to suffer in 2008.
But a glimmer of hope is, indeed, what we have seen this week. There is a new type of deal on the market -- and with any luck, it might just save you from years of mortgage misery.
The Trouble With Fixing
Finding a cheap fixed rate mortgage is particularly problematic right now.
This is partly because lenders aren’t reacting to falls in swap rates (the rate at which banks will lend to each other). Swap rates for two-, three- and five-year fixes peaked almost a month ago, yet some lenders (such as Halifax and Nat West) have continued to increase the cost of their fixed rate mortgages.
This leaves the average cost of a fixed rate deal looking prohibitive:
Type Of Deal | Average Rate |
|---|
Two-year fixed rate | 7.07% |
Three-year fixed rate | 7.25% |
Five-year fixed rate | 6.93% |
Source: Moneyfacts, 07.07.2008
What’s more, fixed rate mortgages tend to come with hefty product and arrangement fees -- especially for borrowers who don’t have large deposits.
Thumbs Up For Trackers
At the moment, some of the cheapest mortgage deals on the market are trackers.
As you may know, a tracker mortgage tracks the Bank of England base rate (currently 5%) from a certain distance, wherever it goes. So every time the base rate changes, the rate of a tracker mortgage will, too -- which means lenders will pass on any base rate cuts and rises.
Usually, a tracker is only competitive for two or three years, and then it reverts to a more expensive rate.
But have you ever heard of a lifetime tracker? These deals track the base rate at a competitive distance for the entire lifetime of the mortgage. Over the years, these deals can save you thousands and thousands of pounds, because you need never pay hefty fees in order to remortgage, ever again.
From today, Woolwich has cut the cost of its lifetime tracker mortgages, rocketing these deals into the best buy tables and finally giving hard-pressed borrowers some good news.
Here's a breakdown of the different rates on offer:
Product | Interest Rate | Up-Front Fees | Maximum Loan To Value (LTV) Ratio | Early Repayment Charges (ERCs) |
|---|
Lifetime Tracker | 5.89% | Home valuation fee, from £245 | 60% | None |
Lifetime Tracker | 6.39% | Home valuation fee, from £245 | 80% | None |
Lifetime Tracker | 6.59% | Home valuation fee, from £245 | 90% | None |
This product is only available direct from Woolwich.
A major advantage of all three ‘versions’ of this lifetime tracker is the lack of upfront fees.
Customers are asked to pay for their property to be valued -- but, unusually in the current climate, no other application or product fees are payable.
The absence of Early Repayment Charges (ERCs) is another rare bonus. It means that borrowers can overpay or move their mortgage at any time they choose, without being penalised.
Perhaps most importantly, this lifetime tracker is a new market-leader for anyone with a deposit or equity of at least 40%. Even the cheapest two year fixed deal available (from First Direct) is 0.10% more expensive -- and it comes with up-front fees of over £2,000, plus ERCs.
In terms of trackers, Woolwich’s 5.89% deal is only pipped to the ‘best buy’ post by Norwich & Peterborough’s base rate tracker at 5.75%. This comes with a fee of £999.
For most borrowers, this charge -- plus Norwich & Peterborough’s application of ERCs for three years -- ensures the Woolwich deal will be more appealing.
Smarter Than The SVR
Depending on individual circumstances, homeowners currently on their lender’s Standard Variable Rate could benefit from switching to the Woolwich lifetime tracker.
With no arrangement or product fees, the deal is almost as easy to move to as an SVR -- and its lack of ERCs make it as easy to depart from.
While the rate is variable, the fact that your rate will always be tied to the base rate prevents arbitrary price hikes.
It also means that your mortgage will remain consistently competitive in relation to new deals on the market.
What’s The Catch?
Borrowers on tight budgets should always approach trackers with caution.
Remember, if the base rate rises, anyone on a tracker could see their monthly mortgage payments increase. So if you do not think you would be able to cope with a hike in your mortgage payments, you will be better off with a fixed rate deal, where the rate will stay level.
Furthermore, not every version of this lifetime tracker from Woolwich is as competitive as the 5.89% offering.
Borrowers who need to borrow 80% or 90% of the value of their property will be able to find cheaper short-term trackers -- though some will come with high product fees, arrangement fees and ERCs.
So all in all, I think Woolwich’s new offering could be a good bet for some of Britain’s beleaguered homeowners.
In fact, amid the general gloom, this thoroughly decent deal shines like a gem!
More: Forget Fixing And Take A Tracker | Watch Out For This Fee!
> Anyone in need of mortgage advice could benefit from using an independent, whole of market mortgage broker, such as The Motley Fool Mortgage Service.
